Lesson Two:Why Teach Financial Literacy?
In 1990, my best friend, Mike, took over his father's empire and is, in fact, doing a better job than his dad did. We see each other once or twice a year on the golf course. He and his wife are wealthier than you could imagine. Rich dad's empire is in great hands, and Mike is now grooming1 his son to take his place, as his dad had groomed2 us.
In 1994, I retired3 at the age of 47, and my wife, Kim, was 37. Retirement4 does not mean not working. To my wife and me, it means that barring unforeseen cataclysmic changes, we can work or not work, and our wealth grows automatically, staying way ahead of inflation. I guess it means freedom. The assets are large enough to grow by themselves. It's like planting a tree. You water it for years and then one day it doesn't need you anymore. It's roots have gone down deep enough. Then, the tree provides shade for your enjoyment5.
Mike chose to run the empire and I chose to retire.
Whenever I speak to groups of people, they often ask what I would recommend or what could they do? "How do they get started?" "Is there a good book I would recommend?" "What should they do to prepare their children?" "What is the secret to success?" "How do I make millions?" I am always reminded of this article I was once given. It goes as follows.
THE RICHEST BUSINESSMEN
In 1923 a group of our greatest leaders and richest businessmen held a meeting at the Edgewater Beach hotel in Chicago. Among them were Charles Schwab, head of the largest independent steel company; Samuel Instill, president of the world's largest utility; Howard Hopson, head of the largest gas company; Ivar Kreuger president of the International Match Co., one of the world's largest companies at that time; Leon Frazier, president of the Bank of International Settlements; Richard Whitney, president of the New York Stock Exchange; Arthur Cotton and Jesse Livermore, two of the biggest stock speculators; and Albert Fall, a member of President Harding's cabinet. Twenty five years later nine of them (those listed above) ended as follows. Schwab died penniless after living for five years on borrowed money. Instill died broke living in a foreign land. Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall were just released from prison. Fraser and Livermore committed suicide.
I doubt if anyone can say what really happened to these men. If you look at the date, 1923, it was just before the 1929 market crash and the Great Depression, which I suspect had a great impact on these men and their lives. The point is this: Today we live in times of greater and faster change than these men did. I suspect there will be many booms and busts6 in the next 25 years that will parallel the ups and downs these men faced. I am concerned that too many people are focused too much on money and not their greatest wealth, which is their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve problems, I am afraid those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.
Most people fail to realize that in life, it's not how much money you make, it's how much money you keep. We have all heard stories of lottery8 winners who are poor, then suddenly rich, then poor again. They win millions and are soon back to where they started. Or stories of professional athletes, who, at the age of 24, are earning millions of dollars a year, and are sleeping under a bridge by age 34. In the paper this morning, as I write this, there is a story of a young basketball player who a year ago had millions. Today, he claims his friends, attorney and accountant took his money, and now he works at a car wash for minimum wage.
He is only 29. He was fired from the car wash because he refused to take off his championship ring as he was wiping off the cars, so his story made the newspaper. He is appealing his termination, claiming hardship and discrimination and that the ring is all he has left. He claims that if you take that away, he'll crumble9.
In 1997, I know so many people who are becoming instant millionaires. It's the Roaring '20s one more time. And while I am glad people have been getting richer and richer, I only caution that in the long run, it's not how much you make, it's how much you keep, and how many generations you keep it.
So when people ask, "Where do I get started?" or "Tell me how to get rich quick," they often are greatly disappointed with my answer. I simply say to them what my rich dad said back to me when I was a little kid. "If you want to be rich, you need to be financially literate10."
That idea was drummed into my head every time we were together. As I said, my educated dad stressed the importance of reading books, while my rich dad stressed the need to master financial literacy.
If you are going to build the Empire State Building, the first thing you need to do is dig a deep hole and pour a strong foundation. If you are going to build a home in the suburbs, all you need to do is pour a 6-inch slab11 of concrete. Most people, in their drive to get rich, are trying to build an Empire State Building on a 6-inch slab.
Our school system, having been created in the Agrarian12 Age, still believes in homes with no foundation. Dirt floors are still the rage. So kids graduate from school with virtually no financial foundation. One day, sleepless13 and deep in debt in suburbia, living the American Dream, they decide that the answer to their financial problems is to find a way to get rich quick.
Construction on the skyscraper14 begins. It goes up quickly, and soon, instead of the Empire State Building, we have the Leaning Tower of Suburbia. The sleepless nights return.
As for Mike and me in our adult years, both of our choices were possible because we were taught to pour a strong financial foundation when we were just kids.
Now, accounting15 is possibly the most boring subject in the world. It also could be the most confusing. But if you want to be rich, long term, it could be the most important subject. The question is, how do you take a boring and confusing subject and teach it to kids? The answer is, make it simple. Teach it first in pictures.
My rich dad poured a strong financial foundation for Mike and me. Since we were just kids, he created a simple way to teach us. For years he only drew pictures and used words. Mike and I understood the simple drawings, the jargon16, the movement of money, and then in later years, rich dad began adding numbers. Today, Mike has gone on to master much more complex and sophisticated accounting analysis because he has had to. He has a billion-dollar empire to run. I am not as sophisticated because my empire is smaller, yet we come from the same simple foundation. In the following pages, I offer to you the same simple line drawings Mike's dad created for us. Though simple, those drawings helped guide two little boys in building great sums of wealth on a solid and deep foundation.
Rule One. You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know. It is Rule No. 1. It is the only rule. This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability.
"Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets"
When rich dad explained this to Mike and me, we thought he was kidding. Here we were, nearly teenagers and waiting for the secret to getting rich, and this was his answer. It was so simple that we had to stop for a long time to think about it.
"What is an asset?" asked Mike.
"Don't worry right now," said rich dad. "Just let the idea sink in. If you can comprehend the simplicity17, your life will have a plan and be financially easy. It is simple; that is why the idea is missed."
"You mean all we need to know is what an asset is, acquire them and we'll be rich?" I asked.
Rich dad nodded his head. "It's that simple."
"If it's that simple, how come everyone is not rich?" I asked.
Rich dad smiled. "Because people do not know the difference
between an asset and a liability."
I remember asking, "How could adults be so silly. If it is that simple, if it is that important, why would everyone not want to find out?"
It took our rich dad only a few minutes to explain what assets and liabilities were.
As an adult, I have difficulty explaining it to other adults. Why? Because adults are smarter. In most cases, the simplicity of the idea escapes most adults because they have been educated differently. They have been educated by other educated professionals, such as bankers, accountants, real estate agents, financial planners, and so forth18. The difficulty comes in asking adults to unlearn, or become children again. An intelligent adult often feels it is demeaning to pay attention to simplistic definitions.
Rich dad believed in the KISS principle-"Keep It Simple Stupid"-so he kept it simple for two young boys, and that made the financial foundation strong.
So what causes the confusion? Or how could something so simple be so screwed up? Why would someone buy an asset that was really a liability. The answer is found in basic education.
We focus on the word "literacy" and not "financial literacy." What defines something to be an asset, or something to be a liability are not words. In fact, if you really want to be confused, look up the words "asset" and "liability" in the dictionary. I know the definition may sound good to a trained accountant, but for the average person it makes no sense. But we adults are often too proud to admit that something does not make sense.
As young boys, rich dad said, "What defines an asset is not words but numbers. And if you cannot read the numbers, you cannot tell an asset from a hole in the ground."
"In accounting," rich dad would say, "it's not the numbers, but what the numbers are telling you. It's just like words. It's not the words, but the story the words are telling you.
Many people read, but do not understand much. It's called reading comprehension. And we all have different abilities when it comes to reading comprehension. For example, I recently bought a new VCR. It came with an instruction book that explained how to program the VCR. All I wanted to do was record my favorite TV show on Friday night. I nearly went crazy trying to read the manual. Nothing in my world is more complex than learning how to program my VCR. I could read the words, but I understood nothing. I get an "A" for recognizing the words. I get an "F" for comprehension. And so it is with financial statements for most people.
"If you want to be rich, you've got to read and understand numbers." If I heard that once, I heard it a thousand times from my rich dad. And I also heard, "The rich acquire assets and the poor and middle class acquire liabilities."
Here is how to tell the difference between an asset and a liability. Most accountants and financial professionals do net agree with the definitions, but these simple drawings were the start of strong financial foundations for two young boys.
To teach pre?teen boys, rich dad kept everything simple, using as many pictures as possible, as few words as possible, and no numbers for years.
"This is the Cash Flow pattern of an asset."
The above box is an Income Statement, often called a Profit and Loss Statement. It measures income and expenses. Money in and money out. The bottom diagram is the Balance Sheet. It is called that because it is
supposed to balance assets against liabilities. Many financial novices19 don't know the relationship between the Income Statement and the Balance Sheet. That relationship is vital to understand.
The primary cause of financial struggle is simply not knowing the difference between an asset and a liability. The cause of the confusion is found in the definition of the two words. If you want a lesson in confusion, simply look up the words "asset" and "liability" in the dictionary.
Now it may make sense to trained accountants, but to the average person, it may as well be written in Mandarin21. You read the words in the definition, but true comprehension is difficult.
So as I said earlier, my rich dad simply told two young boys that "assets put money in your pocket." Nice, simple and usable.
"This is Cash Flow pattern of a liability."
Now that assets and liabilities have been defined through pictures, it may be easier to understand my definitions in words.
An asset is something that puts money in my pocket.
A liability is something that takes money out of my pocket.
This is really all you need to know. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities. It's not knowing the difference that causes most of the financial struggle in the real world.
Illiteracy22, both in words and numbers, is the foundation of financial struggle. If people are having difficulties financially, there is something that they cannot read, either in numbers or words. Something is misunderstood. The rich are rich because they are more literate in different areas than people who struggle financially. So if you want to be rich and maintain your wealth, it's important to be financially literate, in words as well as numbers.
The arrows in the diagrams represent the flow of cash, or "cash flow." Numbers alone really mean little. Just as words alone mean little. It's the story that counts. In financial reporting, reading numbers is looking for the plot, the story. The story of where the cash is flowing. In 80 percent of most families, the financial story is a story of working hard in an effort to get ahead. Not because they don't make money. But because they spend their lives buying liabilities instead of assets.
For instance, this is the cash flow pattern of a poor person, or a young person still at home:
Job (provides income)-> Expenses(Taxes Food Rent Clothes Fun Transportation)
Asset (none)
Liability (none)
This is the cash flow pattern of a person in the middle class:
Job (provides income)-> Expenses(Taxes Food Mortgage Clothes Fun Transportation)
Asset (none)
Liability (Mortgage Consumer loans Credit Cards)
This is the cash flow pattern of a wealthy person:
Assets(stocks bonds notes real estate intellectual property)->income (dividends interest rental23 income royalties)
Liabilities (none)
All of these diagrams were obviously oversimplified. Everyone has living expenses, the need for food, shelter and clothing.
The diagrams show the flow of cash through a poor, middle class or wealthy person's life. It is the cash flow that tells the story. It is the story of how a person handles their money, what they do after they get the money in their hand.
The reason I started with the story of the richest men in America is to illustrate24 the flaw in the thinking of so many people. The flaw is that money will solve all problems. That is why I cringe whenever 1 hear people ask me how to get rich quicker. Or where do they start? I often hear, "I'm in debt so I need lo make more money."
But more money will often not solve the problem; in fact, it may actually accelerate the problem. Money often makes obvious our tragic25 human flaws. Money often puts a spotlight26 on what we do not know. That is why, all too often, a person who comes into a sudden windfall of cash-let's say an inheritance, a pay raise or lottery winnings-soon returns to the same financial mess, if not worse than the mess they were in before they received the money. Money only accentuates27 the cash flow pattern running in your head. If your pattern is to spend everything you get, most likely an increase in cash will just result in an increase in spending. Thus, the saying, "A fool and his money is one big party," I have said many times that we go to school to gain scholastic28 skills and professional skills, both important. We learn to make money with our professional skills. In the 1960s, when I was in high school, if someone did well in school academically, almost immediately people assumed this bright student would go on to be a medical doctor. Often no one asked the child if they wanted to be a doctor. It was assumed. It was the profession with the promise of the greatest financial reward.
Today, doctors are facing financial challenges I would not wish on my worst enemy; insurance companies taking control of the business, managed health care, government intervention29, and malpractice suits, to name a few. Today, kids want to be basketball stars, golfers like Tiger Woods, computer nerds, movie stare, rock stars, beauty queens, or traders on Wall Street. Simply because that is where the fame, money and prestige is. That is the reason it is so hard to motivate kids in school today. They know that professional success is no longer solely30 linked to academic success, as it once was.
Because students leave school without financial skills, millions of educated people pursue their profession successfully, but later find themselves struggling financially. They work harder, but don't get ahead. What is missing from their education is not how to make money, but how to spend money-what to do after you make it. It's called financial aptitude-what you do with the money once you make it, how to keep people from taking it from you, how long you keep it, and how hard that money works for you. Most people cannot tell why they struggle financially because they don't understand cash flow. A person can be highly educated, professionally successful and financially illiterate32. These people often work harder than they need to because they learned how to work hard, but not how to have their money work for them.
The story of bow the quest for a Financial Dream turns into a financial nightmare. The moving-picture show of hard-working people has a set pattern. Recently married, the happy, highly educated young couple move in together, in one of their cramped33 rented apartments. Immediately, they realize that they are saving money because two can live as cheaply as
one.
The problem is, the apartment is cramped. They decide to save money to buy their dream home so they can have kids. They now have two incomes, and they begin to focus on their careers.
Their incomes begin to increase.
As their incomes go up...their expenses go up as well.
The No. 1 expense for most people is taxes. Many people think it's income tax, but for most Americans their highest tax is Social Security. As an employee, it appears as if the Social Security tax combined with the Medicare tax rate is roughly 7.5 percent, but it's really 15 percent since the employer must match the Social Security amount. In essence, it is money the employer cannot pay you. On top of that, you still have to pay income tax on the amount deducted34 from your wages for Social Security tax, income you never receive because it went directly to Social Security through withholding35. Then, their liabilities go up.
This is best demonstrated by going back to the young couple. As a result of their incomes going up, they decide to go out and buy the house of their dreams. Once in their house, they have a new tax, called property tax. Then, they buy a new car, new furniture and new appliances to match [heir new house. Ail7 of a sudden, they wake up and their liabilities column is full of mortgage debt and credit-card debt.
They're now trapped in the rat race. A child comes along. They work harder. The process repeats itself. More money and higher taxes, also called bracket creep, A credit card comes in the mail. They use it. It maxes out. A loan company calls and says their greatest "asset," their home, has appreciated in value. The company offers a "bill consolidation36" loan, because their credit is so good, and tells them the intelligent thing to do is clear off the high-interest consumer debt by paying off their credit card. And besides, interest on their home is a tax deduction37. They go for it, and pay off those high-interest credit cards. They breathe a sigh of relief. Their credit cards are paid off. They've now folded their consumer debt into their home mortgage. Their payments go down because they extend their debt over 30 years. It is the smart thing to do.
Their neighbor calls to invite them to go shopping-the Memorial Day sale is on. A chance to save some money. They say to themselves, "I won't buy anything. I'll just go look." But just in case they find something, they tuck that clean credit card inside their wallet.
I run into this young couple all the time. Their names change, but their financial dilemma38 is the same. They come to one of my talks to hear what I have to say. They ask me, "Can you tell us how to make more money?" Their spending habits have caused them to seek more income.
They don't even know that the trouble is really how they choose to spend the money they do have, and that is the real cause of their financial struggle. It is caused by financial illiteracy and not understanding the difference between an asset and a liability.
More money seldom solves someone's money problems. Intelligence solves problems, There is a saying a friend of mine says over and over to people in debt.
"If you find you have dug yourself into a hole... stop digging."
As a child, my dad often told us that the Japanese were aware of three powers; "The power of the sword, the jewel and the mirror."
The sword symbolizes40 the power of weapons. America has spent trillions of dollars on weapons and, because of this, is the supreme41 military presence in the world.
The jewel symbolizes the power of money. There is some degree of truth to the saying, "Remember the golden rule. He who has the gold makes the rules."
The mirror symbolizes the power of self-knowledge. This self-knowledge, according to Japanese legend, was the most treasured of the three.
The poor and middle class all loo often allow the power of money to control them. By simply getting up and working harder, failing to ask themselves if what they do makes sense, they shoot themselves in the foot as they leave for work every morning. By not fully31 understanding nioney, the vast majority of people allow the awesome42 power of money to control them. The power of money is used against them.
If they used the power of the mirror, they would have asked themselves, "Does this make sense?" All too often, instead of trusting their inner wisdom, that genius inside of them, most people go along with the crowd. They do things because everybody else does it. They conform rather than question. Often, they mindlessly repeat what they have been told. Ideas such as "diversify43" or "your home is an asset." "Your home is your biggest investment." "You get a tax break for going into greater debt." "Get a safe job." "Don't make mistakes." "Don't take risks."
It is said that the fear of public speaking is a fear greater than death for most people. According to psychiatrists44, the fear of public speaking is caused by the fear of ostracism45, the fear of standing39 out, the fear of criticism, the fear of ridicule46, the fear of being an outcast. The fear of being different prevents most people from seeking new ways to solve their problems.
That is why my educated dad said the Japanese valued the power of the mirror the most, for it is only when we as humans look into the mirror do we find truth. And the main reason that most people say "Play it safe1' is out of fear. That goes for anything, be it sports, relationships, career, money.
It is that same fear, the fear of ostracism that causes people to conform and not question commonly accepted opinions or popular trends. "Your home is an asset." "Get a bill consolidation loan and get out of debt." "Work harder." "It's a promotion47." "Someday I'll be a vice20 president." "Save money." "When ! get a raise, I'll buy us a bigger house." "Mutual48 funds are safe." "Tickle49 Me Elmo dolls are out of stock, but I just happen to have one in back that another customer has not come by for yet."
Many great financial problems are caused by going along with the crowd and trying to keep up with the Joneses. Occasionally, we all need to look in the mirror and be true to our inner wisdom rather than our fears.
By the time Mike and I were 16 years old, we began to have problems in school. We were not bad kids. We just began to separate from the crowd. We worked for Mike's dad after school and on the weekends. Mike and I often spent hours after work just sitting at a table with his dad while he held meetings with his bankers, attorneys, accountants, brokers50, investors51, managers and employees. Here was a man who had left school at the age of 13, now directing, instructing, ordering and asking questions of educated people. They came at his beck and call, and cringed when he did not approve of them.
Here was a man who had not gone along with the crowd. He was a man who did his own thinking and detested53 the words, "We have to do it this way because that's the way everyone else does it." He also hated the word "can't." If you wanted him to do something, just say, "I don't think
you can do it."
Mike and I learned more sitting at his meetings than we did in all our years of school, college included. Mike's dad was not school educated, but he was financially educated and successful as a result. He use to tell us over and over again. "An intelligent person hires people who are more intelligent than they are." So Mike and I had the benefit of spending hours listening to and, in the process, learning From
intelligent people.
But because of this, both Mike and I just could not go along with the standard dogma that our teachers preached, And that caused the problems. Whenever the teacher said, "If you don't get good grades, you won't do well in the real world," Mike and I just raised our eyebrows54. When we were told to follow set procedures and not deviate55 from the rules, we could see how this schooling56 process actually discouraged creativity. We started to understand why our rich dad told us that schools were designed to produce good employees instead of employers.
Occasionally Mike or I would ask our teachers how what we studied was applicable, or we asked why we never studied money and how it worked. To the later question, we often got the answer that money was not important, that if we excelled in our education, the money would follow.
The more we knew about the power of money, the more distant we grew from the teachers and our classmates.
My highly educated dad never pressured me about my grades. I often wondered why. But we did begin to argue about money. By the time I was 16, I probably had a far better foundation with money than both my mom and dad. I could keep books, I listened to tax accountants, corporate57 attorneys, bankers, real estate brokers, investors and so forth. My dad talked to teachers.
One day, my dad was telling me why our home was his greatest investment. A not-too-pleasant argument took place when I showed him why I thought a house was not a good investment.
The following diagram illustrates58 the difference in perception between my rich dad and my poor dad when it came to their homes. One dad thought his house was an asset, and the other dad thought it was a liability.
I remember when I drew a diagram for my dad showing him the direction of cash flow. I also showed him the ancillary59 expenses that went along with owning the home. A bigger home meant bigger expenses, and the cash flow kept going out through the expense column.
Today, I am still challenged on the idea of a house not being an asset. And 1 know that for many people, it is their dream as well as their largest investment. And owning your own home is better than nothing. I simply offer an alternate way of looking at this popular dogma. If my wife and I were to buy a bigger, more flashy house we realize it would not be an asset, it would be a liability, since it would take money out of
our pocket.
So here is the argument I put forth. I really do not expect most people to agree with it because a nice home is an emotional thing. And when it comes to money, high emotions tend to lower financial intelligence. 1 know from personal experience that money has a way of making every decision emotional.
1. When it comes to houses, I point out that most people work all their lives paying for a home they never own. In other words, most people buy a new house every so many years, each time incurring60 a new 30-year loan to pay off the previous one.
2. Even though people receive a tax deduction for interest on mortgage payments, they pay for all their other expenses with after-tax dollars. Even after they pay off their mortgage.
3. Property taxes. My wife's parents were shocked when the property taxes on their home went to $1,000 a month. This was after they had retired, so the increase put a strain on their retirement budget, and they felt forced to move.
4 Houses do not always go up in value. In 1997, I still have friends who owe a million dollars for a home that will today sell for only $700,000.
5. The greatest losses of all are those from missed opportunities. If all your money is tied up in your house, you may be forced to work harder because your money continues blowing out of the expense column, instead of adding to the asset column, the classic middle class cash flow pattern. If a young couple would put more money into their asset column early on, their later years would get easier, especially as they prepared to send their children to college. Their assets would have grown and would be available to help cover expenses. All too often, a house only serves as a vehicle for incurring a home-equity loan to pay for mounting expenses. In summary, the end result in making a decision to own a house that is too expensive in lieu of starting an investment portfolio61 early on impacts an individual in at least the following three ways:
1. Loss of time, during which other assets could have grown in value.
2. Loss of additional capital, which could have been invested instead of paying for high-maintenance expenses related directly to the home.
3. Loss of education. Too often, people count their house, savings62 and retirement plan as all they have in their asset column. Because they have no money to invest, they simply do not invest. This costs them investment experience. Most never become what the investment world calls a "sophisticated investor52." And the best investments are usually first sold to "sophisticated investors," who then turn around and sell them to the people playing it safe. I am not saying don't buy a house. I am saying, understand the difference between an asset and a liability. When I want a bigger house, I first buy assets that will generate the cash flow to pay for the house.
My educated dad's personal financial statement best demonstrates the life of someone in the rat race. His expenses seem to always keep up with his income, never allowing him to invest in assets. As a result, his liabilities, such as his mortgage and credit card debts are larger than his assets. The following picture is worth a thousand words:
Educated Dad's Financial Statement
Income=Expense
Asset < Liability
My rich dad's personal financial statement, on the other hand, reflects the results of a life dedicated63 to investing and minimizing liabilities:
Rich Dad's Financial Statement
Income > Expense
Asset > Liability
A review of my rich dad's financial statement is why the rich get richer. The asset column generates more than enough income to cover expenses, with the balance reinvested into the asset column. The asset column continues to grow and, therefore, the income it produces grows with it.
The result being: The rich get richer!
Why the Rich Get Richer
Income -> Assets -> More Income
Expenses are low, Liabilities are low
The middle class finds itself in a constant state of financial struggle. Their primary- income is through wages, and as their wages increase, so do their taxes. Their expenses tend to increase in equal increments64 as their wages increase; hence the phrase "the rat race." They treat their home as their primary asset, instead on investing in income-producing assets.
Why the Middle Class Struggle
Income goes up, Expenses go up
Assets do not increase, Liabilities do increase
This pattern of treating your home as an investment and the philosophy that a pay raise means you can buy a larger home or spend more is the foundation of today's debt-ridden society. This process of increased spending throws families into greater debt and into more financial uncertainty65, even though they may be advancing in their jobs and receiving pay raises on a regular basis. This is high risk living caused by weak financial education.
The massive loss of jobs in the 1990s-the downsizing of businesses-has brought to light how shaky the middle class really is financially. Suddenly, company pension plans are being replaced by 401k plans. Social Security is obviously in trouble and cannot be looked at as a source for retirement. Panic has sei in for the middle class. The good thing today is that many of these people have recognized these issues and have begun buying mutual funds. This increase in investing is largely responsible for the huge rally we have seen in the stock market. Today, there are more and more mutual funds being created to answer the demand by the middle class.
Mutual funds are popular because they represent safety. Average mutual fund buyers are too busy working to pay taxes and mortgages, save for their children's college and pay off credit cards. They do not have time to study to learn how to invest, so they rely on the expertise66 of the manager of a mutual fund. Also, because the mutual fund includes many different types of investments, they feel their money is safer because ii is "diversified67."
This group of educated middle class subscribes68 to the "diversify" dogma put out by mutual fund brokers and financial planners. Play it safe. Avoid risk.
The real tragedy is that the lack of early financial education is what creates the risk faced by average middle class people. The reason they have to play it safe is because their financial positions are tenuous69 at best. Their balance sheets are not balanced. They are loaded with liabilities, with no real assets that generate income. Typically, their only source of income is their paycheck. Their livelihood70 becomes entirely71 dependent on their employer.
So when genuine "deals of a lifetime" come along, those same people cannot take advantage of the opportunity. They must play it safe, simply because they are working so hard, are taxed to the max, and are loaded with debt.
As I said at the start of this section, the most important rule is to know the difference between an asset and a liability. Once you understand the difference, concentrate your efforts on only buying income-generating assets. That's the best way to get started on a path to becoming rich. Keep doing that, and your asset column will grow. Focus on keeping liabilities and expenses down. This will make more money available to continue pouring into the asset column. Soon, the asset base will be so deep that you can afford to look at more speculative72 investments. Investments that may have returns of 100 percent to infinity73. Investments that for $5,000 are soon turned into $1 million or more. Investments that the middle class calls "too risky74." The investment is not risky. It's the lack of simple financial intelligence, beginning with financial literacy, that causes the individual to be "too risky,"
If you do what the masses do, you get the following picture.
Income = Work for Owner
Expense = Work for Government
Asset = (none)
Liability = Work for Bank
As an employee who is also a homeowner, your working efforts are generally as follows:
1. You work for someone else. Most people, working for a paycheck, are making the owner, or the shareholders75 richer. Your efforts and success will help provide for the owner's success and retirement.
2. You work for the government. The government takes its share from your paycheck before you even see it. By working harder, you simply increase the amount of taxes taken by the government - most people work from January to May just for the government.
3. You work for the bank. After taxes, your next largest expense is usually your mortgage and credit card debt.
The problem with simply working harder is that each of these three levels takes a greater share of your increased efforts. You need to learn how to have your increased efforts benefit you and your family directly.
Once you have decided76 to concentrate on minding your own business, how do you set your goals? For most people, they must keep their profession and rely on their wages to fund their acquisition of assets.
As their assets grow, how do they measure the extent of their success? When does someone realize that they are rich, that they have wealth? As well as having my own definitions for assets and liabilities, I also have my own definition for wealth. Actually I borrowed it from a man named Buckminster Fuller. Some call him a quack77, and others call him a living genius. Years ago he got all the architects buzzing because he applied78 for a patent in 1961 for something called a geodesic dome79. But in the application, Fuller also said something about wealth. It was pretty confusing at first, but after reading it for awhile, it began to make some sense: Wealth is a person's ability to survive so many number of days forward... or if I stopped working today, how long could I survive?
Unlike net worth-the difference between your assets and liabilities, which is often filled with a person's expensive junk and opinions of what things are worth-this definition creates the possibility for developing a truly accurate measurement. I could now measure and really know where I was in terms of my goal to become financially independent.
Although net worth often includes these non-cash-producing assets, like stuff you bought that now sits in your garage, wealth measures how much money your money is making and, therefore, your financial survivability.
Wealth is the measure of the cash flow from the asset column compared with the expense column.
Let's use an example. Let's say I have cash flow from my asset column of S"J,000 a month. And I have monthly expenses of 52,000. What is my wealth?
Let's go back to Buckminster Fuller's definition. Using his definition, how many days forward can I survive? And let's assume a 30-day month. By that definition, I have enough cash flow for half a month.
When I have achieved $2,000 a month cash flow from my assets, then I will be wealthy.
So I am not yet rich, but I am wealthy. I now have income generated from assets each month that fully cover my monthly expenses. If I want to increase my expenses, I first must increase my cash flow from assets to maintain this level of wealth. Take notice that it is at this point that I no longer am dependent on my wages. I have focused on and been successful in building an asset column that has made me financially independent. If I quit my job today, I would be able to cover my monthly expenses with the cash flow from my assets.
My next goal would be to have the excess cash flow from my assets reinvested into the asset column. The more money that goes into my asset column, the more my asset column grows. The more my assets grow, the more my cash flow grows. And as long as I keep my expenses less than the cash flow from these assets, I will grow richer, with more and more income from sources other than my physical labor80.
As this reinvestment process continues, I am well on my way to being rich. The actual definition of rich is in the eye of the beholder81. You can never be too rich.
Just remember this simple observation: The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets. So how do I start minding my own business? What is the answer? Listen to the founder82 of McDonald's.
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1
grooming
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| n. 修饰, 美容，（动物）梳理毛发 | |
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groomed
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| v.照料或梳洗（马等）( groom的过去式和过去分词 )；使做好准备；训练；（给动物）擦洗 | |
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retired
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| adj.隐退的，退休的，退役的 | |
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retirement
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| n.退休，退职 | |
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enjoyment
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| n.乐趣；享有；享用 | |
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busts
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| 半身雕塑像( bust的名词复数 )； 妇女的胸部； 胸围； 突击搜捕 | |
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ail
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| v.生病，折磨，苦恼 | |
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lottery
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| n.抽彩；碰运气的事，难于算计的事 | |
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crumble
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| vi.碎裂，崩溃；vt.弄碎，摧毁 | |
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literate
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| n.学者；adj.精通文学的，受过教育的 | |
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slab
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| n.平板，厚的切片；v.切成厚板，以平板盖上 | |
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agrarian
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| adj.土地的，农村的，农业的 | |
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sleepless
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| adj.不睡眠的，睡不著的，不休息的 | |
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skyscraper
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| n.摩天大楼 | |
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accounting
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| n.会计，会计学，借贷对照表 | |
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jargon
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| n.术语，行话 | |
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simplicity
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| n.简单，简易；朴素；直率，单纯 | |
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forth
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| adv.向前；向外，往外 | |
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novices
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| n.新手( novice的名词复数 )；初学修士（或修女）；（修会等的）初学生；尚未赢过大赛的赛马 | |
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vice
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| n.坏事；恶习；[pl.]台钳，老虎钳；adj.副的 | |
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Mandarin
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| n.中国官话，国语，满清官吏；adj.华丽辞藻的 | |
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illiteracy
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| n.文盲 | |
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rental
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| n.租赁，出租，出租业 | |
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illustrate
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| v.举例说明，阐明；图解，加插图 | |
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tragic
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| adj.悲剧的，悲剧性的，悲惨的 | |
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spotlight
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| n.公众注意的中心，聚光灯，探照灯，视听，注意，醒目 | |
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accentuates
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| v.重读( accentuate的第三人称单数 )；使突出；使恶化；加重音符号于 | |
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scholastic
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| adj.学校的，学院的，学术上的 | |
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intervention
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| n.介入，干涉，干预 | |
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solely
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| adv.仅仅，唯一地 | |
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fully
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| adv.完全地，全部地，彻底地；充分地 | |
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illiterate
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| adj.文盲的；无知的；n.文盲 | |
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cramped
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| a.狭窄的 | |
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deducted
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| v.扣除，减去( deduct的过去式和过去分词 ) | |
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withholding
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| 扣缴税款 | |
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consolidation
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| n.合并,巩固 | |
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deduction
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| n.减除，扣除，减除额；推论，推理，演绎 | |
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dilemma
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| n.困境，进退两难的局面 | |
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standing
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| n.持续，地位；adj.永久的，不动的，直立的，不流动的 | |
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symbolizes
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| v.象征，作为…的象征( symbolize的第三人称单数 ) | |
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supreme
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| adj.极度的，最重要的；至高的，最高的 | |
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awesome
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| adj.令人惊叹的，难得吓人的，很好的 | |
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diversify
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| v.（使）不同，（使）变得多样化 | |
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psychiatrists
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| n.精神病专家，精神病医生( psychiatrist的名词复数 ) | |
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ostracism
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| n.放逐；排斥 | |
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ridicule
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| v.讥讽，挖苦；n.嘲弄 | |
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promotion
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| n.提升，晋级；促销，宣传 | |
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mutual
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| adj.相互的，彼此的；共同的，共有的 | |
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tickle
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| v.搔痒，胳肢；使高兴；发痒；n.搔痒，发痒 | |
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50
brokers
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| n.（股票、外币等）经纪人( broker的名词复数 )；中间人；代理商；（订合同的）中人v.做掮客（或中人等）( broker的第三人称单数 )；作为权力经纪人进行谈判；以中间人等身份安排… | |
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investors
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| n.投资者，出资者( investor的名词复数 ) | |
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investor
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| n.投资者，投资人 | |
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detested
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| v.憎恶，嫌恶，痛恨( detest的过去式和过去分词 ) | |
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eyebrows
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| 眉毛( eyebrow的名词复数 ) | |
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deviate
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| v.(from)背离，偏离 | |
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56
schooling
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| n.教育；正规学校教育 | |
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57
corporate
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| adj.共同的，全体的；公司的，企业的 | |
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illustrates
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| 给…加插图( illustrate的第三人称单数 )； 说明； 表明； （用示例、图画等）说明 | |
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ancillary
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| adj.附属的，从属的 | |
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incurring
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| 遭受，招致，引起( incur的现在分词 ) | |
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61
portfolio
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| n.公事包；文件夹；大臣及部长职位 | |
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savings
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| n.存款，储蓄 | |
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dedicated
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| adj.一心一意的；献身的；热诚的 | |
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increments
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| n.增长( increment的名词复数 )；增量；增额；定期的加薪 | |
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65
uncertainty
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| n.易变，靠不住，不确知，不确定的事物 | |
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expertise
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| n.专门知识(或技能等)，专长 | |
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67
diversified
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| adj.多样化的，多种经营的v.使多样化，多样化( diversify的过去式和过去分词 )；进入新的商业领域 | |
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68
subscribes
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| v.捐助( subscribe的第三人称单数 )；签署，题词；订阅；同意 | |
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69
tenuous
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| adj.细薄的，稀薄的，空洞的 | |
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livelihood
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| n.生计，谋生之道 | |
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71
entirely
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| ad.全部地，完整地；完全地，彻底地 | |
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speculative
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| adj.思索性的，暝想性的，推理的 | |
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infinity
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| n.无限，无穷，大量 | |
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risky
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| adj.有风险的，冒险的 | |
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shareholders
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| n.股东( shareholder的名词复数 ) | |
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decided
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| adj.决定了的，坚决的；明显的，明确的 | |
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quack
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| n.庸医；江湖医生；冒充内行的人；骗子 | |
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applied
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| adj.应用的；v.应用，适用 | |
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dome
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| n.圆屋顶，拱顶 | |
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labor
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| n.劳动，努力，工作，劳工；分娩；vi.劳动，努力，苦干；vt.详细分析；麻烦 | |
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beholder
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| n.观看者，旁观者 | |
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Founder
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| n.创始者，缔造者 | |
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